US and UK-based lender found a niche supporting start-ups - its loss will make it harder for growing companies to access finance
The collapse of Silicon Valley Bank (SVB) in early March shocked investors. The US lender expired just days after its first problems became apparent. SVB was a major investor in technology-based companies, especially startups, including many across life sciences and cleantech sectors; its demise ranks as the second-largest failure in US banking history.
Why was SVB important to the tech sector?
An unusual bank, its customers were typically startups, growing companies and investors in the tech, healthcare and biotech sectors. It did business with almost half of all US startups backed by venture capital, and 44% of all US venture-backed tech and healthcare firms that went public last year.
The bank’s (separate) UK arm held about £7 billion in deposits from 3000 business customers and loans of around £5.5 billion. Around 16 technology and life sciences companies in Europe reportedly had substantial exposure to SVB in the UK and US.
SVB provided traditional banking services to companies, but it also gave out special loans secured against companies’ equity (venture debt), lent to entrepreneurs, became a partner in venture funds and invested in tech and biotech companies via private equity firms. For its size, this made it unique as a bank in terms of funding the life science sector. It funded startups that might otherwise have struggled getting credit from a larger bank.
How and why did SVB collapse?
On 10 March, US Federal regulators stepped in to seize the assets of what had been the country’s 16th largest bank. It was the second largest banking collapse in US history – second only to Lehman Brothers in 2008.
In 2021, a flood of deposits flowed into the bank after its clients – most of them technology businesses based in Silicon Valley – experienced a pandemic-fuelled boom in new funding. At the end of 2022, SVB had had approximately $209 billion in total assets and about $175 billion in total deposits.
With interest rates being low, SVB had opted over recent years to lock up about $100 billion of this money in government-backed securities, which offer long-term security, but at low interest rates. Once interest rates in the US began to rise, the value of these bonds plunged. Towards the end of 2022 as SVB’s customers battled tougher economic conditions, they needed to withdraw money from the bank. That forced the lender to sell a chunk of its long-dated bonds at a $1.8 billion loss to cover demand.
In early March, SVB announced it would raise $2.25 billion to offset this loss by selling stock. This selloff of its shares saw other US banks slide, and ensuing panic among venture capital firms and their portfolio companies, accentuated by social media, triggered a classic bank run. Depositors tried to withdraw $42 billion from SVB on 9 March, and it ran out of cash resources.
The bank has been criticised for embracing a risky strategy for modest returns. But its collapse had little to do with the underlying investments, according to some experts.
What were the immediate effects?
Lots of smaller firms reportedly had all their cash reserves at SVB and paid staff salaries through the bank. Once such firms got nervous, word spread and the concentrated customer base of SVB accentuated the bank run.
The US government stepped in to guarantee deposits for customers of the bank’s US arm, and the majority of its deposits and loans will now be transferred to First Citizens – a lender based in North Carolina, US. When the bank’s UK arm was deemed insolvent by the Bank of England, multinational colossus HSBC stepped in to buy SVB UK for £1. The UK Bioindustry Association welcomed the move, noting that around 40% of UK biotechs banked with SVB.
Will it affect ongoing investment in chemistry startups?
For some, the major impact of SVB’s demise will be to remove a large fount of funding for the life sciences sector, especially for startups and young companies. There is no bank of a similar size ready to step in and fill the void. SVB in particular offered backing to venture capitalists for investments in life science companies. SVB recently moved into the climate-tech area, where startups are booming due to US government incentives.
From a practical point of view, SVB made it easy for startups to set up banking facilities, something European venture capitalists say can be made onerous by money laundering legislation.
What’s the bigger picture for biotech funding?
For the last two years, the biotech sector particularly has experienced record levels of investment – healthcare venture capital funding in the US was over $28 billion in 2021 and almost $22 billion in 2022 according to a report from SVB in January – more than double 2019 levels. The market had been buoyed in part by investors seeking stronger potential returns in a low interest rate environment, where other investments were performing poorly.
With interest rates rising, the appetite for riskier biotech investments has decreased. Combined with the loss of a major institutional funder in the form of SVB, this will potentially make it much more difficult (and expensive) for growing companies to access capital investment and loans, or to raise money by floating on stock markets. Mergers and acquisitions could also become less common, as borrowing to fund takeovers becomes more expensive for potential acquirers.
Steve Brozak, president of WBB Securities, an investment bank and research firm specialising in biotech
Sander Slootweg, manager partner and co-founder of Forbion, a European venture capital firm focused on life sciences with 43 active portfolio companies